The Hindu Business Line : A grassroots approach to corporate governance

The board of directors of a company are assisted by a group of executives who carry out the decisions. .At the meeting of the auditor with the board of directors, these executives apprise the board of the implications of any representations to be made by them. As persons understanding the importance of such a representation, they form a bridge between the management and the auditor, thereby giving an impression that they have a bigger role to play.

In an enterprise there are different levels of management, the highest being the board of directors. The board consists of not only executive directors but also independent directors, nominee directors, and so on. The overall affairs of a company are looked after by the board. The directors have to delegate the authority to the second line of management to give shape to their thoughts. The board only directs the company, it is the second rung of management which is in charge of the implementation. The directors are assisted by a group of executives who carry out the decisions. It may be a committee, a cell created for a specific purpose, or an individual such as an executive director, managing director, whole-time director or head of a department. This group of persons is given the task of governance. They are responsible for the implementation of the decisions taken by the board.

Those in charge of governance may be at two or more levels. It is possible that the managing director, overall, is responsible to the board. He becomes a part of those responsible for governance. He may further delegate the work to those below for proper monitoring. Else, he may be the chairman of a particular committee, an audit committee for example.

Functions of those handling governance

Those in-charge of governance are accountable to the board for implementing the decisions, and their functions include:

Ensuring proper implementation of internal control systems;

Follow up in case the auditor issues a letter of weakness;

Being alert to any inherent weaknesses in the internal control systems;

Prevention of frauds and errors;

Liaison with outside agencies such as government agencies, auditors, etc.;

Preparation of financial statements on behalf of the management;

Secretarial work; and

Ensuring compliance with requirements of GAAPs, and so on.

Auditor and those in charge of governance

During the course of an audit, the auditor deals with those handling governance. He looks to them for information needed for audit.

At the planning stage, he gathers the initial information, scheduling of work, travel plans and other arrangements for smooth conduct of an audit. The information to be gathered and the matters to be discussed with the management at the planning stage, as suggested by AAS 8, are dealt more with the audit committee, being those handling governance as the board of directors cannot be involved in all the matters.

Audit communications are generally addressed to those handling governance unless the situation demands bringing it to the notice of the board. If the person entrusted with the audit responsibility does not provide information to the auditor, he may go to the audit committee, then to the managing director and only then to the board.

AAS 2 requires the auditor to probe further in case fraud is suspected so as to confirm or dispel such a suspicion. At this stage, the auditor may involve those charged with governance.

AAS 4 on frauds and errors suggests that the auditor communicates with those involvedwith governance in case the frauds are committed by the line staff. But in case the fraud is by one in charge of governance, he is obliged to bring it to the notice of the board.

AAS 6 on risk assessment and evaluation of internal controls speaks of letter of weakness. This letter is also primarily addressed to those charged with governance for them to take corrective actions.

AAS 9 suggests that the expert appointed be acceptable to the management as well. The expert may either be engaged or employed by the auditor or the management. Those in charge of governance would have a significant role to play in this regard.

During the course of an audit, it is those responsible for governance who would ensure smooth completion of the audit. Furnishing the necessary information, obtaining the necessary documents from sources concerned, both internal and external, offering clarifications and explanations, providing with the required schedules and documents, etc, are the responsibilities of those in charge of governance.

AAS 11 requires the management representation to be signed by the management and not by any employee. If corporate governance is in vogue, the audit committee may issue the same.

AAS 18 requires the auditor to satisfy himself with the estimates made in the financial statements at the end of the audit. Those handling governance would be responsible for furnishing the estimates to the auditor and the need as well as the quantum of estimate. Justification of the estimate is to be provided by those responsible for governance.

AAS 19 requires the auditor to consider subsequent events in the financial statements. Whether there are any material events to be considered or not and the nature of such events can be obtained from those in charge of governance.

AAS 27 requires the auditor to communicate all routine matters to the governance in-charge. Perhaps the auditor would do well to obtain a letter of authorisation from the board vesting the power in those charged with governance.

AAS 30 on audit confirmations also suggests dealing with those in governance to seek cooperation in the matter of obtaining confirmation from the third parties concerned. At times the auditor may be requested by them not to send letters of confirmation to specific parties because of a pending dispute. He/she has to thoroughly discuss the matter with them before deciding whether or not to send in such requests for confirmation.

Financial statements cannot be said to be giving a true and fair view unless they are written in accordance with GAAPs. It is again those involved in governance who are responsible for ensuring compliance with GAAPs. Applicability of various accounting standards, disclosure requirements, etc., is to be taken care of by them. After the audit is completed, and before the matter is taken to the board for its consideration, the auditor discusses his report primarily with those handlinggovernance.

At the meeting of the auditor and the board, those responsible for governance have a key role to play. Since the directors may not be fully aware of the requirements of such a representation, they apprise the board of the implications of any representations to be made by them. As persons understanding the importance of such a representation, they form a bridge between the management and the auditor.

It appears those handling governance have a bigger role to play in audit than the board of directors.

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